China unveils boldest reforms in decades, shows Xi in command

BEIJING (Reuters) - China unwrapped its boldest set of economic and social reforms in nearly three decades on Friday, relaxing its one-child policy and further freeing up markets in order to put the world’s second-largest economy on a more stable footing.

The Great Hall of the People, where the Chinese Communist Party plenum is being held, is seen behinds red flags in Tiananmen square in Beijing November 12, 2013. REUTERS/Kim Kyung-Hoon

The sweeping changes helped dispel doubts about the leadership’s zest for the reforms needed to give the economy fresh momentum as three decades of breakneck expansion shows signs of faltering. However, the reforms may take years.

A document released by the Communist Party following a four-day conclave of its senior leaders promised land and residence registration reforms needed to boost China’s urban population and allow its transition to a western-style services- and consumption-driven economy.

Pricing of fuels, electricity and other key resources - now a source of major distortions - would be mainly decided by markets, while Beijing also pledged to speed up the opening of its capital account and further financial liberalization.

“The reforms are unprecedented,” said Xu Hongcai, senior economist at the China Centre for International Economic Exchanges, a well-connected Beijing think tank. “Reforms in 1990s were limited to some areas, now reforms are all-round.”

Analysts suggested the plans are the most significant since Deng Xiaoping led a series of reforms in the late 1970s and the early 1980s. Those changes eventually opened up the country to the outside world and set it on course to become the champion economy of emerging markets.

President Xi Jinping and Premier Li Keqiang, appointed in March, announced several breakthroughs in social policy, pledging to unify rural and urban social security systems and to abolish controversial labor camps.

The 60-point plan, more comprehensive and specific than initially thought, also eased concerns that Xi would need months if not years to take full charge of China’s vast party and government bureaucracy.

China-watchers took the establishment of a working group to lead economic reform and a new State Security Council as further signs of how effectively Xi had managed to consolidate power just eight months after he officially took over.

“This is much more of a top-down, systemic leadership compared to the 1980s and 1990s. Compared to previous generations, this is a remarkably robust leadership,” said Dali Yang, a political science professor at the University of Chicago.

CAUTION

Still, Xi and his team gave themselves until 2020 to achieve “decisive” results - a tacit acknowledgement of the risks involved in Beijing’s balancing act between letting market forces eventually take over and preserving financial and social stability and the Communist Party’s political monopoly.

The experience of the past decade is also a reason why many economists and international observers view Beijing’s bold reform plans with guarded optimism.

Just like Xi and Li, the previous leadership promised to overhaul China’s economy and kick its addiction to rapid, investment and credit-fuelled growth, but left it saddled with more debt, industrial overcapacity, pollution and financial strains.

U.S. Treasury Secretary Jack Lew echoed that caution during a stopover in Beijing on his Asian tour, describing the plans as “ambitious” and noting that key was how soon they would become reality.

“The direction is significant, but the character and the pace of change matters,” Lew told reporters.

The initial brief reform outline published on Tuesday triggered a stock market sell-off, with investors taking its scant details as a sign of a lack of commitment on Xi’s part or his failure to overcome resistance of vested interests, such as powerful state-owned companies.

But a raft of specific policy plans ranging from interest rate and currency regime liberalization to residence registration and land reforms and the pledge to allow more competition seemed to put such concerns to rest.

According to the document, the government had decided to work toward an independent judiciary - courts would be “appropriately” separated from local governments.

Under government reform, it relaxed the need for government approval on projects and said the performance of local officials would be rated on measures other than just economic growth, such as in environmental protection.

The commitment to abolish re-education through labor camps was also remarkable, given that several political sources had told Reuters this was an area where Xi was facing much resistance.

LONG PROCESS

Few commentators had also expected any significant attempts to take on powerful state monopolies, even though many economists argue that loosening the stranglehold of big state-owned firms’ on markets from banking to energy was key to success of other reforms.

The initial outline of the plans on Tuesday had affirmed those firms’ strategic role in the economy. But the longer report on Friday raised state firm dividend payments, allowed private firms to enter some of the protected sectors and encouraged them to take part in reforming the state-owned firms.

All in all, the proposed reforms are part of China’s grand transformation design: retooling the economy towards greater reliance on consumption, services and moving up the manufacturing value chain, while tackling deepening inequality and discontent, a source of great anxiety for a leadership that prizes stability over everything else.

Chinese leaders are acutely aware of what is at stake as years of rapid growth come to an end. Having been the factory to the world, they want to avoid the so-called middle-income trap, where wealth creation stagnates as market share is lost to lower-cost rivals.

The World Bank says China’s per capita GDP was $6,188 last year, compared with $22,590 in South Korea, $36,796 in Hong Kong and $51,709 in Singapore - Asian peers that have succeeded in making such a transition.

What appeared to be a leak of the document on Chinese social media earlier on Friday set off a rally in Chinese stock markets hours before its official release, with investors cheering its relatively detailed language on reforms.

Still, economists said that having a good plan was only part of the success and making the ambitious agenda a reality would be the new leaders’ true challenge.

“Based on the headlines ... they are moving in a positive direction,” said Jan von Gerich, fixed income chief analyst with Nordea Bank in Helsinki. “But one should not get too carried away as this will be a long process.”